27four Investment Managers
13th February 2018
How workers can use their muscle to reform corporate South Africa
Fresh political momentum presents an opportunity to revisit old challenges with new energy.
There is now focus from all groups to return the economy to high levels of growth. As we push to reignite the economy, it is important to balance the goal of growth with the need for economic justice and a more inclusive economy.
One area of emphasis is the restructuring of ownership of the economy, especially in favour of workers. Yet it is easy to forget or deny that black worker ownership is well under way. Black workers own a sizeable chunk of the listed equity sector.
Institutional investment (pension funds, insurance funds and investment schemes) now accounts for 52% to 58% of the JSE100, by far the largest category of local investment, and this overwhelmingly represents the interests of black workers. Workers’ pension funds have 83% black membership, while the biggest investor on the JSE, the Government Employees Pension Fund, owns nearly 40% of reported assets. These primarily represent the interests of ordinary workers.
Moreover, recent reports commissioned by the JSE and Treasury found that 20% to 23% of shares in the JSE100 are owned by black South Africans: about half directly and about half (between 11% and 13% of the JSE) indirectly thorough institutional funds. This could be a foundation on which to build further transformation.
The pertinent question is why workers aren’t using the rights of ownership to push for reform of corporate SA. Consider corporate leadership. The Steinhoff debacle highlights the importance of representative diversity in the leadership of large companies. Yet, despite progress, few of the boards and senior management teams of big companies are truly representative. As a rough proxy, 90% of CEOs and 85% of board chairpersons of the JSE top 40 companies are white men.
Why don’t workers, as owners, press companies for more racially diverse leadership? Why don’t they demand better corporate governance or shared value business models?
The answer lies in the intermediary relationships. Workers delegate oversight of their savings to trustees, half of whom are worker-nominated. But worker trustees are often workers, elected through a union. They rarely have access to financial or commercial networks. Many do not have investment, economic or fiduciary training to be effective trustees.
A 2017 survey by 27four Investment Managers found that of the total of R4.7-trillion of savings and investments, only 9% is managed by black-owned asset management firms. Thus, predominantly white-owned or controlled asset managers retain de facto control over the levers of transformation in corporate SA: deciding where capital should be allocated, who should be appointed to boards and who should be endorsed for senior positions.
White asset managers have networks of trust in finance and commerce that remain largely white. They make appointments from these networks, perpetuating the racial patterns.
To be fair, this is not a conspiracy so much as the outcome of a segregated history that makes us more comfortable with those who look, talk and live like us. And there is little incentive for a white fund manager to challenge the status quo.
Here are five solutions that will help break this cycle:
• We need to speak more honestly about the benefits and limits of ownership. Ownership does not always create wealth, nor does it always give control.
• Worker pension funds could organise and vote on investment mandates for a corporate agenda they believe in. They could establish a central co-ordinating body and guidelines for trustees.
• More investment is needed in training and developing a professional class of black worker trustees.
• Workers’ trustees must hold asset managers to account for the election of directors and for a meaningful environmental, social and governance strategy in every company they invest in. The UN-backed Principles for Responsible Investment provide a model investment mandate that trustees can use. Funds managers should also be expected to engage actively with companies on their plans to help to solve social challenges.
• Black and white business associations could be more proactive in creating platforms for white and black asset managers to identify, meet and build trust with talented black executives.
Worker capital owns a significant part of the economy but it has not yet grasped the power that comes with ownership.
• Oliphant is chairman of Third Way Investment Partners, All Weather Capital, and RH Bophelo, and Short is a partner at Genesis Analytics. They write in their personal capacities.